Mar 31, 2018

Netflix Inc. (NASDAQ: NFLX) Zacks Rank 3-Hold

$295.35 USD ( As of 03/29/18 ) Style:Value: Growth: Momentum: VGM:

Data Overview Summary

52 Week High-Low $333.98 - $138.66 Netflix's shares have vastly outperformed the industry in the past year. The
20 Day Average Volume 12,573,373
company’s efforts to attract viewers through investing in more regional programming
is leading to robust addition of international subscribers. The company remains
Beta 0.96
confident of adding more subscribers as the trend of binge viewing is catching up fast.
Market Cap 82.03 B Netflix now has 117.58 million subscribers globally. We believe continuing subscriber
Dividend / Div Yld $0.00 / 0.00% addition and expanding content portfolio are the key catalysts that will help Netflix to
Broadcast Radio and
sustain growth going forward. However, increasing market spends and higher
Industry investments on original/acquired content will continue to hurt profitability, at least in
Television
the near term. Rising competition is also a major concern.
Industry Rank 129 / 265 (Top 49%)

Current Ratio 1.40

Debt/Capital 64.47% Elements of the Zacks Rank

Net Margin 4.78%
Agreement Estimate Revisions (60 days)
Price/Book (P/B) 35.78

Price/Cash Flow (P/CF) 18.60

100% 100% 100% 100%
Earnings Yield 0.92%

Debt/Equity 1.81
Q1 (Current Qtr) Q2 (Next Qtr) F1 (Current Year) F2 (Next Year)
Value Score Revisions: 2 Revisions: 1 Revisions: 3 Revisions: 3
Up: 2 Down: 0 Up: 0 Down: 1 Up: 3 Down: 0 Up: 3 Down: 0
P/E (F1) 108.09

P/E (F1) Rel to Industry 114.76

Magnitude Consensus Estimate Trend (60 days)
PEG Ratio 4.05

P/S (F1) 10.96

P/S (TTM) 10.96

P/CFO 18.60

P/CFO Rel to Industry 1.08

60 30 7 Current 60 30 7 Current 60 30 7 Current 60 30 7 Current
Days Days Days Days Days Days Days Days Days Days Days Days
EV/EBITDA Annual 18.39
Q1 +3.28% Q2 0% F1 +2.25% F2 +2.41%
Growth Score
Proj. EPS Growth (F1/F0) 118.59%
Upside Zacks Consensus Estimate vs. Most Accurate Estimate
Hist. EPS Growth (Q0/Q-1) 35.89%

Qtr CFO Growth -199.71

2 Yr CFO Growth -130.84

Return on Equity (ROE) 17.20% Most Accurate: 0.63 Most Accurate: 0.60 Most Accurate: 2.70 Most Accurate: 4.71
(NI - CFO) / Total Assets NA Zacks Consensus: 0.63 Zacks Consensus: 0.65 Zacks Consensus: 2.73 Zacks Consensus: 4.25

Asset Turnover 0.70 Q1 0.60% Q2 -7.80% F1 -1.37% F2 10.72%

Momentum Score
Surprise Reported Earnings History
1 week Volume change 4.50%

1 week Price Cng Rel to Industry -0.05%

(F1) EPS Est 1 week change 0.00%

(F1) EPS Est 4 week change 0.00%

Reported: 0.41 Reported: 0.29 Reported: 0.15 Reported: 0.40 Average 4 Qtr
(F1) EPS Est 12 week change 18.31%
Surprise
Estimate: 0.41 Estimate: 0.32 Estimate: 0.16 Estimate: 0.38
(Q1) EPS Est 1 week change 0.00%
Q End 12/17 Q End 09/17 Q End 06/17 Q End 03/17

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 The data on the front page and all the charts in the report represent market data as of 03/29/18, while the report's text is as of
03/29/2018

Overview
Founded in 1997 and headquartered in Los Gatos, CA, Netflix Inc. is
a provider of Internet television (streaming services) and DVD–rental
services. It streams movies and television shows to both domestic
and international subscribers who can watch them on a host of
devices, including television sets, computers and mobile devices.

The company reports its revenues under three separate

segments—Domestic Streaming, International Streaming and
Domestic DVD. The Domestic and International Streaming segments
generate revenues from monthly subscriptions on exclusive, non-
exclusive and original content in the U.S. and international markets
(present in about 190 countries). In the Domestic DVD segment,
Netflix delivers DVDs through the U.S. Postal Service from
distribution centers located in major U.S. cities.

In 2017, Netflix earned $11.693 billion in revenues. Domestic

streaming revenues came in at $6.153 billion (or 52.6% of total
revenue). Revenues from International streaming came in at $5.089
billion (43.5%) whereas revenues from DVD segment came in at
$0.451 billion.

In the domestic market, the company faces competition from Google

Inc., Amazon.com Inc. and Apple Inc. in the movie streaming
business. Additionally, Netflix competes with Movie Gallery Inc. and Red Box—the kiosk company owned by Coinstar Inc.—in the DVD
rental business.

Zacks Equity Research: NFLX www.zacks.com Page 2 of 9

 Reasons To Buy:
Netflix’s growing subscriber base is the primary factor that helps it generate Netflix's international
significant revenues. In the last reported quarter, Netflix recorded 8.3 million net new expansion and focus on
additions, way ahead of management’s guidance of 6.3 million. Netflix attributed this as original content will boost
result of the strength of its content. The company remains confident of adding more and subscriber growth.
more subscribers as the trend of Internet TV/binge viewing catches up fast. Going
ahead, the company expects to add 1.45 million subscribers in the domestic streaming
segment and 4.9 million subscribers in the international segment in the first quarter of 2018. The company’s efforts to attract
viewers through investing in more regional programming should also boost user base.

Netflix is now focusing on producing more quality original content than ever to increase as well as broadly diversify its subscriber
base. To establish itself as a leading content provider, the company is taking a number of initiatives, including the development of
more kids- and family-oriented content. In Sep 2016, CFO David Wells commented that the company plans to make 50% of its total
content original over the next few years. The company is also forming strategic partnerships with the likes of TiVo, CBC, Disney and
others to boost its content further. All the movies will be available for global viewing. These aside, the company has also signed a
deal with luxury theatre, iPic Entertainment to release its movies in theaters at the same time as they are released online. The move
is a positive for Netflix as it will not only get greater brand visibility but will also open up nominations for the prestigious awards like
Oscars and Emmys. Nominations (and wins) help boost the digital, streaming and DVD business for such films. In September 2017,
Netflix won 20 Emmy Awards out of the 91 categories that it was nominated for as compared with nine awards and 54 nominations
that the company had in 2016. The company has also won eight Oscar nominations this year. This reflects Netflix’s strengthening
content portfolio. The company is also snapping up Hollywood talent to boost its movie business. Veteran Hollywood producer, Scott
Stuber will spearhead its movie division from now on. Netflix plans to release 80 original movies in 2018.

Rapid international expansion has paid off for Netflix, with the company adding 6.36 million net new subscribers overseas in the
quarter, much ahead of the expected 5.05 million. International Streaming revenues (47.2% of total revenue) soared 63.5% year
over year to $1.550 billion driven by an increase in paid members. Netflix now has 62.83 million subscribers internationally. Going
ahead, the company expects to add another 4.90 million international subscribers in the first quarter. In 2016, the company rolled
out its service simultaneously in 130 countries— including India, Azerbaijan, Vietnam, Nigeria, Poland, Russia, Saudi Arabia,
Singapore, South Korea, Turkey and Indonesia—taking the total presence to 190. To attract subscribers, Netflix will offer free
service in the first month. Also, Netflix plans to add more regional languages to make the service more appealing. As of now, it
offers content in over 24 languages. The aggressive expansion is definitely impressive and has been well reflected in the quarterly
numbers. The company, however, is striving hard to break the China Wall, given the sheer demographic strength of the country.
Unfortunately, stringent regulations have proved an impediment so far.

Netflix’s applications for both Android and Apple devices have helped it expand its market share. Netflix subscribers can stream
any movie or show of their choice through these devices. Comcast has made the Netflix app available on its X1 platform, featuring
voice controls and search results, among other things. The company had earlier introduced HD video and AirPlay Streaming on
these devices. Moreover, other devices such as handheld gaming consoles are also being targeted by the company to reach a wider
audience. The company entered into partnerships with cable television providers Virgin Media (in the U.K.) and Com Hem (in
Sweden) to provide its service through set-top boxes from TiVo. The company has partnerships with three cable companies—RCN,
Atlantic Broadband, and Grande Communications—which will further boost subscriber base. Moreover, in a sort of an about turn,
the company signed promotional deals with Univision to broadcast two of its shows on TV, ahead of the season’s premiere on
Netflix, to bring more viewers under its fold. Meanwhile in a surprising development, Netflix has also made foray into video games
business. It has introduced Infinite Runner, a game, in the web that features some of the well known characters from its popular
shows. The company had also created a free mobile game based on its popular series Stranger Things, before releasing its sequel
on the streaming platform in October.

Risks
Netflix primarily faces competition from bellwethers like Amazon Prime Instant Video, Hulu and Time Warner’s HBO, which also
offer online streaming services. Given the scope for growth in the market, all the players are ramping up their efforts to boost their
subscriber base. Amazon is also undertaking a number of initiatives to enhance its content portfolio and even venturing into
original programming, which might pose some challenges for Netflix. It recently ventured into live streaming sports with NFL deal.
Moreover, Amazon has also launched a video-only subscription plan in addition to its complete Prime service on a monthly
payment basis. Hulu, on the other hand, has partnered with the likes of Sony Pictures to broaden its content offerings. In addition,
it is also offering more pocket-friendly plans (though not ad-free) for users. HBO, which held the crown of for original content
developing, is now also focusing on expansion. Competition is heating up further with players like Facebook, Snapchat and
Twitter also making efforts to improve video viewing on their platform. Facebook has struck partnerships with lots of celebrities
and media houses to churn original live content for its platform. Moreover, Apple is also gearing up to boost its original content
portfolio.

International expansion and content additions resulted in cost escalations in the form of technology investments and marketing

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 expenses. However, the recent expansions will further dent the company’s profitability in the near term. Moreover, it is also
expecting a significant amount of debt, which should add to interest expense. In 2018, the company plans to spend around $7.5-8
billion on original content. It is also likely to spend another $1.3-$2 billion on marketing its content this year. We believe that
Netflix’s ability to effectively manage costs will dictate its future prospects.

Cash flow burn is here to stay. The company said it expects free cash flow to be negative for years to come as it diverts more
capital into producing content. In the fourth quarter, Netflix reported $523.8 million free cash outflow, taking the figure to $2.019
billion for fiscal 2017. Moreover, management reaffirmed its earlier guidance for total cash flow burn for the current year in the
range of $3–$4 billion. Although the fresh content will help in driving rapid subscriber growth, the increase in free cash outflow
does not augur well for investors.

Netflix’s popularity primarily depends on its ability to deliver new and updated content. This is a major challenge for the
company as it continues to face cost escalation from higher license and renewal fees. This will weigh on the company’s balance
sheet. In case it leads to a price increase, there can be a backlash on subscriber growth.

Last Earnings Report

Netflix’s fourth-quarter 2017 earnings of 41 cents per share came in line with the Zacks Quarter Ending 12/2017
Consensus Estimate but grew a whopping 173.3% on a year-over-year basis. Revenues of
Report Date Jan 22, 2018
$3.286 billion increased 32.6% year over year and came ahead of the consensus estimate
of $3.281 billion. Sales Surprise 0.15%
EPS Surprise 0.00%
The company added 8.3 million subscribers (highest in history), much more than the Quarterly EPS 0.41
expected 6.3 million, which shows how attractive its portfolio is to consumers.
Annual EPS (TTM) 1.25

Netflix’s focus on international expansion and original regional content has paid off, with
6.36 million overseas net new additions in the quarter. The company reported profit from
the international operations this quarter as well.

The fourth quarter had a strong programming slate, with new seasons of popular shows like Stranger Things, Black Mirror and The
Crown and new releases like Godless, Marvel’s The Punisher and Mindhunter. The company’s portfolio of original films witnessed
significant improvement with the addition of Bright, starring Will Smith and Joel Edgerton, to its platform this quarter.

The company’s effort to strengthen regional programming is a key growth driver. An original German series named Dark, the third
season of Club de Cuervos and The Day I Met El Chapo, both from Mexico, Italian-language thriller series Suburra and UK-based Jack
Whitehall: Travels with My Father are helping it draw more international subscribers.

Segment Revenues

International Streaming revenues (47.2% of total revenue) soared 63.5% year over year to $1.55 billion driven by an increase in paid
members.

Domestic Streaming revenues (49.6% of total revenue) improved 16.2% from the year-ago quarter to about $1.63 billion.

However, the DVD business continues to be in trouble, with revenues (3.2% of total revenue) declining 17.3% year over year to $105
million.

Subscriber Base

At the end of the quarter, Netflix's paid streaming members across the globe were 110.64 million, up from 89.09 million in the prior-year
quarter. Netflix now has 117.58 million subscribers globally.

In the Domestic Streaming segment, Netflix’s subscriber base totaled 54.75 million, up from 49.43 million in the year-ago quarter. Paid
members increased to 52.81 million from 47.91 million in the year-ago period.

In the International Streaming segment, the company recorded 62.83 million members compared with 44.37 million in the prior-year
quarter. Paid members were 57.83 million, up from 41.19 million in the year-ago quarter.

Margins

Consolidated contribution profit margin (revenues minus the cost of revenues and marketing cost) was 23.1% compared with 21.8% in
the year-ago quarter.

Consolidated operating income grew 59.4% year over year to $245.3 million. Consolidated operating margin increased 120 basis points
(bps) to 7.5%.

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 Balance Sheet

Netflix had $2.823 billion in cash and cash equivalents as of Dec 31, 2017 compared with $1.746 billion as of Sep 30, 2017.

Cash used in operations in the quarter was $487.96 million compared with $557.16 million used in operations in the prior-year quarter.
The company reported free cash outflow of $523.8 million.

Outlook

For the first quarter of 2018, management forecasts earnings of 63 cents per share.

Domestic and international streaming revenues are expected to be $1.807 billion and $1.780 billion, respectively. Total streaming
revenues are expected to be $3.587 billion while total revenue, including the DVD business, is anticipated to be $3.686 billion.

Management expects to add 1.45 million subscribers in the domestic streaming segment and 4.90 million subscribers in the
international segment.

For fiscal 2018, the company forecasts operating margin of 10%, indicating an expansion of 300 bps from the prior year.

Netflix also provided an estimate for marketing spend in 2018 in the range of $1.3-$2 billion. The company plans to spend $7.5-$8
billion on content this year.

Netflix plans to release 30 international original series in 2018.

Recent News
On Mar 28, 2018, Netflix announced the appointment of former White House security advisor Susan Rice to its board.

On Jan 22, 2018, Netflix announced the appointment of Rodolphe Belmer to its board, taking the total number of members to 10.

On Oct 27, 2017, Netflix announced the promotion of Jessica Neal as the company’s Chief Talent Officer.

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 Industry Analysis Zacks Industry Rank: 129 / 265 (Top 49%) Top Peers

Cars.com Inc. (CARS)

Ctrip.com International, Ltd. (CTRP)
eBay Inc. (EBAY)
Booking Holdings Inc. (BKNG)
Alibaba Group Holding Limited (BABA)
Amazon.com, Inc. (AMZN)
BOOHOO COM PLC (BHOOY)
Carvana Co. (CVNA)

Industry Comparison Broadcast Radio And Television | Position in Industry: Industry Peers
5 of 22

NFLX X Industry S&P 500 CBS SKYAY DISCA

VGM Score - -
Market Cap 128.17 B 907.84 M 20.84 B 19.67 B 31.04 B 8.18 B
# of Analysts 16 3.5 15 29 4
Dividend Yield 0.00% 0.00% 1.79% 1.40% 1.78% 0.00%

Value Score - -
Cash/Price 0.02 0.19 0.06 0.02 0.10 0.91
EV/EBITDA 18.39 6.97 12.31 10.85 15.28 4.00
PEG Ratio 4.05 1.54 1.75 0.75 1.54 0.92
Price/Book (P/B) 35.78 2.27 3.22 9.95 6.36 2.54
Price/Cash Flow (P/CF) 18.60 7.55 13.78 10.21 12.06 2.41
P/E (F1) 108.09 9.99 16.87 9.91 20.02 8.12
Price/Sales (P/S) 10.96 1.19 2.48 1.44 NA 1.19
Earnings Yield 0.92% 5.47% 5.91% 10.10% 4.99% 12.32%
Debt/Equity 1.81 1.07 0.69 4.78 2.13 3.20
Cash Flow ($/share) 15.88 2.11 5.82 5.03 6.03 8.89

Growth Score - -
Hist. EPS Growth (3-5 yrs) 35.89% 8.47% 6.95% 10.80% NA -10.81%
Proj. EPS Growth (F1/F0) 118.59% 29.79% 18.39% 23.78% 17.86% 17.86%
Curr. Cash Flow Growth 34.78% -4.41% 7.70% -6.63% -14.71% 43.34%
Hist. Cash Flow Growth (3-5 yrs) 32.00% 10.43% 7.16% -0.69% 5.89% 18.52%
Current Ratio 1.40 2.00 1.32 1.58 0.96 5.34
Debt/Capital 64.47% 61.89% 41.66% 82.71% 68.08% 76.69%
Net Margin 4.78% 6.33% 9.91% 2.61% NA -4.90%
Return on Equity 17.20% 8.69% 16.16% 67.23% NA 21.68%
Sales/Assets 0.70 0.41 0.54 0.61 NA 0.35
Proj. Sales Growth (F1/F0) 35.86% 0.64% 5.79% 6.36% 12.35% 59.00%

Momentum Score - -
Daily Price Chg 3.35% 0.00% 1.29% -0.94% -1.58% 1.23%
1 Week Price Chg -0.05% -0.05% -0.05% -0.03% 0.00% -0.09%
4 Week Price Chg 1.71% -2.81% -0.16% -1.38% -3.29% -10.93%
12 Week Price Chg 43.63% -10.74% -3.15% -11.40% 33.50% -3.16%
52 Week Price Chg 99.48% -22.05% 9.08% -25.89% 49.02% -25.33%
20 Day Average Volume 12,573,373 85,921 2,463,425 4,009,911 4,625 5,998,079
(F1) EPS Est 1 week change 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
(F1) EPS Est 4 week change 0.00% 0.25% 0.00% 0.25% 1.97% 18.19%
(F1) EPS Est 12 week change 18.31% 7.23% 6.10% 4.48% 7.72% 20.82%
(Q1) EPS Est Mthly Chg 0.00% -0.42% 0.00% -0.83% NA 8.18%

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 Zacks Rank Education
The Zacks Rank is calculated from four primary inputs: Agreement, Magnitude, Upside and Surprise.

Agreement
This is the extent which brokerage analysts are revising their earnings estimates in the same
direction. The greater the percentage of estimates being revised higher, the better the score for this
component.

For example, if there were 10 estimate revisions over the last 60 days, with 8 of those revisions up,
and the other 2 down, then the agreement factor would be 80% positive. If, however, 8 were to the
downside with only 2 of them up, then the agreement factor would be 80% negative. The higher the
percentage of agreement the better.

Magnitude
This is a measure based on the size of the recent change in the current consensus estimates. The
Zacks Rank looks at the magnitude of these changes over the last 60 days.

In the chart to the right, the display shows the consensus estimate from 60-days ago, 30-days ago,
7-days ago, and the most current estimate The difference between the current estimate and the
estimate from 60-days ago is displayed as a percentage. A larger positive percentage increase will
score better on this component.

Upside
This is the difference between the most accurate estimate, as calculated by Zacks, and the
consensus estimate. For example, a stock with a consensus estimate of $1.00, and a most
accurate estimate of $1.05 will have an upside factor of 5%.

This is not an indication of how much a stock will go up or down. Instead, it's a measure of the
difference between these two estimates. This is particularly useful near earnings season as a
positive upside percentage can be used to help predict a future surprise.

Surprise
The Zacks Rank also factors in the last few quarters of earnings surprises. Companies that have
positively surprised in the recent past have a tendency of positively surprising again in the future (or
missing if they recently missed).

A stock with a recent track record of positive surprises will score better on this factor than a stock
with a history of negative surprises. These stocks will have a greater likelihood of positively
surprising again.

Zacks Style Score Education

The Zacks Style Score is as a complementary indicator to the Zacks Rank, giving investors a way to
focus on the best Zacks Rank stocks that best fit their own stock picking preferences. Value Score

Academic research has proven that stocks with the best Growth, Value, and Momentum Growth Score
characteristics outperform the market. The Zacks Style Scores rate stocks on each of these
individual styles and assigns a rating of A, B, C, D and F. An A, is better than a B; a B is better than Momentum Score
a C; and so on.
VGM Score
As an investor, you want to buy stocks with the highest probability of success. That means buying
stocks with a Zacks Rank #1 or #2, Strong Buy or Buy, which also has a Style Score of an A or a B.

Zacks Equity Research: NFLX www.zacks.com Page 8 of 9

 Disclosures
The analysts contributing to this report do not hold any shares of this stock. The EPS and revenue forecasts are the Zacks
Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the
analysts' personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or
will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional
information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we
believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the
report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed
herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities
herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy
or sell the securities from time to time. Zacks uses the following rating system for the securities it covers which results from a
proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness
of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank
2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each
company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total.
Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better.
Historically, the top half of the industries has outperformed the general market.

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